Estimating your business expenses and matching your future revenues is fundamental to run a successful business. A business budget can help you determine whether there are sufficient funds to fund your business operations and anticipate business risks. In fact, if you don’t keep a business budget, the risk of spending more money than you actually earn is a potential threat.
These are the steps to a better business budget:
- Check out your industry
Before setting up your business budget, you should consider what your industry calls for. For example, if you plan to operate your business in the retail industry, you should contact local business owners, get information about the industry and check with the IRS to know what percentage of your revenue should be allocated to the different cost categories. There is also plenty of information on the Internet, where you can read relevant articles and get an insight on how business owners operate their small businesses effectively to make a profit. Don’t forget that a small business can be extremely volatile because it is more susceptible to industry downturns. Also, there is the threat of diversified competitors.
- Determine your expenses
The second step is to include both fixed and variable costs in the business budget. Knowing how much money you spend on fixed expenses, allows you to adjust your variable expenses accordingly. Fixed costs are rent, utilities, salaries, property taxes, insurance and depreciation/amortization whereas variable costs can be car maintenance, commissions, credit card fees and more. Make sure to periodically review your business costs and pay extra attention to expenses that fall over or under your projections in order to create an effective business budget.
The typical business costs included in a budget are:
- Rent, utilities
- Equipment, supplies, inventory
- Employee expenses (salaries, wages, regulatory fees, travel expenses and more)
- Car expenses (insurance, fuel expenses, maintenance/repairs, licensing)
- Insurance, license and permit fees
- Business loans
- Advertising and promotion
- Technology expenses
- Taxes (federal taxes, state taxes, local taxes)
- Include one-time expenses
A great incentive for keeping a business budget is that you will be able to factor in one-time purchases. Although one-time spends cannot be predicted, you should include them in your business budget so that you have an accurate picture of your business inflows and outflows.
- Make realistic revenue and profit projections
The third step is to include your revenue and profit estimates in the budget. The trick is to make projections that actually mean something and can provide you with an accurate idea of where your business is heading. The best thing to do is to build two sets of projections, including a conservative scenario and an aggressive scenario. Since you have a clear picture of your business costs, it is easier to estimate your future revenues and adjust them accordingly. In addition, you can calculate ratios like the gross margin, profit margin, ROA and more to make sure your projections are realistic and sound.
- Consider an emergency fund
It is important to have an emergency fund for the rainy days. Including an emergency fund in your projections will allow you to meet a potential office expansion or damages incurred by weather and climate disasters. In addition, you can implement a cost-cutting strategy that will allow you to meet your financial obligations during tight financial times.
- Review your budget periodically
A business budget is dynamic and needs to be adjusted for any new needs. For instance, if you need to spend more money on insurance, review your budget and adjust the figures accordingly. Don’t forget that the reason you are keeping a business budget is to make sure you can meet your financial goals. Questions you can ask are “Did I calculate my income correctly?”, “Are my expense figures accurate?”, “Is my budget based on actual figures?”, “Are future revenues accounted for?”
In conclusion, successful budgeting can help you keep control of your finances. If you set up a successful business budget, you will be able to manage your money effectively and run a profitable business. By reviewing your budget periodically, you can organize your actual expenses and set your future spending goals. A successful budget allows you to make long- and short-term projections about your financial situation and plan for major financial changes.
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